SURVEYING THE TOOL KIT

Lean and Six Sigma are designed to be comprehensive programs. Embedded within the two initiatives are pervasive philosophical principles, values, models, and tools. This creates a challenge when trying to describe what Lean and Six Sigma have to offer when combined. As well, it can make training and implementation challenging because employees may get confused between theory and practical next steps. This is especially true in logistics, given its hands-on focus on operations. Consequently, it is important for the logistician to understand Lean and Six Sigma beyond theory, from a practical point of view. In order to be effective, the logistician must be armed not only with theory, but also practical knowledge and tools that will lend directly to improved operational effectiveness and reduced costs.

Many training courses and books will attempt to separate the Lean tools from the Six Sigma tools. For example, one may argue that voice of the customer is a Six Sigma tool, whereas value stream mapping is a Lean tool. Although the tools’ origins may be traced to one camp or the other, the logistician simply needs to know what tools are available and when they are best applied. For that reason, we have interspersed the tools commonly associated with Lean and Six Sigma across four categories: (1) strategy and planning, (2) problem solving, (3) operations, and (4) measurement. Methods and tools associated with these four categories are reviewed in this section over the next four chapters.

Before introducing the tools of Lean Six Sigma Logistics, three points are critical to note. First, the tools are not “new.” In most cases, it is only their common application to logistics and operations that is new. Second, the list provided is not meant to serve as a comprehensive catalogue of available tools, methods, and concepts, but rather as a representative sample of valued, tested tools used in Lean Six Sigma Logistics. Third, the discussion tied to each tool is intended to provide awareness and the beginnings of a working knowledge of the tool. Fortunately, volumes of reference books and Web content exist for each tool.

This chapter reviews key tools used for strategy and planning that aid in providing direction and scope for Lean Six Sigma Logistics implementation. It is here that the focus and priorities of the organization’s efforts are established; for Lean Six Sigma Logistics is not just about doing things right, but doing the right things right. The Logistics Bridge Model emphasizes hearing the voice of the customer, and it is here that we start our discussion of valued tools.

VOICE OF THE CUSTOMER

The voice of the customer is, as its name suggests, a concept that embraces the input of customers toward the products and services provided to them. This belief is the Six Sigma manifestation of the “marketing concept,” the realization that customers are the business’s reason for being and that it is far more effective and efficient to identify customers’ specific needs first and then develop products and services consistent with these needs. This runs counter to the conventional “production mentality” that suggests finding products and services in which the company excels and then passing those goods and services to customers. This distinction can be summed in a comparison of the statements “We make what we sell” versus “We sell what we make.” Lean Six Sigma Logistics recognizes that understanding customer needs must come first. Pushing products and services to customers can only create waste.

When it comes to logistics services, it is easy to see that not all customers want the same services or expect the same level of service. Some customers seek value-added services like labeling and packaging, others call for transportation and storage, and still others seek only transportation. Among those calling for transportation services, one customer may expect 95 percent on-time performance, 98 percent for another, and 100 percent for yet another. Clearly, a uniform approach to service design and fulfillment will not accommodate customers’ diverse needs.

Key aspects of the customer that the supplier must understand include answers to the following questions:

Figure 20.1. Voice of Customer Cycle.

1. What are the goals of the customer?

2. What are the motivating forces behind these goals?

3. What are the customer’s challenges, constraints, and resources?

4. How can we help the customer meet these goals, given the challenges?

Figure 20.1 integrates these concerns in a cyclical framework. The purpose of a voice of the customer analysis is, ultimately, to better understand the real needs of customers, to “feel their pain.” To deliver greatest value, one cannot limit understanding to what the customer specifically states, but rather must understand the bigger picture, including: (1) the goals of the customer and how the service offering contributes to specific objectives and (2) the drivers for the customer’s goals. This level of understanding leads not only to an improved recognition of the goals and sense of camaraderie based on pursuit of a common objective, but also the prospect of achieving something greater than the customer dared to venture on its own. Solutions not thought possible (or not identified at all) might be possible.

Yet, recognizing goals and drivers stops short of having sufficient information to make the vision a reality. Resources and their constraints must also be recognized and considered in order to devise the plan of attack. Finally, capabilities should be developed to achieve the goals, with measures of success gauged to drive subsequent action. The cycle does not stop here, however. By the time goals are achieved, customer needs have changed and new goals are established, creating what seems like a constantly moving target.

Obviously, life gets complicated when trying to meet the specific needs of customers. For that reason, many companies have turned to segmentation as a method for grouping “like-minded” customers. Treating groups of customers as distinct segments can reduce the complexity of serving a multitude of customers and can also provide some degree of scale economies. The “right-sizing” of service to meet the needs of customers while also providing for the economic needs of the company is discussed next in linking voice of the customer to the voice of the business.

VOICE OF THE BUSINESS

Before addressing each customer’s unique requests, one must understand the value that each customer offers the company in return for the effort. Too often, managers equate volume of sales with the profitability of the account. It is quite possible that the company’s largest customer is the least profitable customer. This is particularly true when a large customer requires wholly unique services and inordinate amounts of handholding, causing the provider to incur exorbitant costs that offset the revenues generated in serving that customer. For this reason, it is critically important for the company to generate a profit and loss statement for each customer. It serves as an important “voice of the business.” Without understanding the value delivered by each customer, it is easy to say “yes” to any customer request. When the costs of providing service to the individual customer can be measured, the manager can readily assess the level of service that is justified.

Figure 20.2 depicts a segment profitability analysis, illustrating the net income (revenues minus avoidable costs) generated with each of three key customers. The top-line revenues earned in serving each customer tell one story, but review of the bottom-line margins tells another. The “big” customer (C) proves to be the least profitable, showing a loss in the current analysis! It looks as though the supplier in this instance has jumped too high too often to see a positive return from this customer. The small customer (B), however, is showing a healthy margin. Concerns should focus on how the company can maintain customer A, grow with customer B, and make customer C profitable.

Recognizing that revenue does not equate with profitability is key for any business. Surprisingly, few companies employ profit analysis on a customer-by-customer basis. The challenge rests with accessing the proper data to populate the analysis. Revenue figures are easy enough to gather, but populating assignable costs (costs that can be applied to specific customers) is more complicated. The ideal solution is to capture information at the desired level of analysis (by customer or segment) to support the tracing of costs to customer- or segment-specific services. In the absence of such information, we must rely on a basis of allocating costs to customer activity. To date, activity-based costing offers the best (though not perfect) means for attaching costs to the activities driven by particular customers and/or products. Figure 20.3 provides a synopsis of the approach and the data required for an activity-based cost analysis.

Figure 20.2. Segment Profitability Analysis by Customer.

Key considerations when conducting activity-based cost analysis include the following:

While activity-based costing is, at its core, a way of allocating costs that are not easily assigned to specific customers, the feeling among most veterans of the method is that the analysis provides cost determinations that are “basically right.” When the costs are then used as an input to a profitability analysis, the company enjoys a level of unprecedented business intelligence. Rather than relying on speculation and hunches that managers have regarding the value of a customer, the proof is presented in black and red ink. The company can now

Figure 20.3. Activity-Based Costing: Calculations and Data. (From Goldsby, Thomas J., Closing in on the true costs of service, Transportation Trends, 1, 2, 1999.)

gauge the level of service that is justified for a given account. One manager likens his experience to a hunting expedition: “Before conducting the profitability-by-customer analysis, we used to shoot in the dark, aiming recklessly at anything that startled us. Now that we have this information, it’s like the lights have been turned on and we can plainly see the targets.” The manager continued by noting how the “hit rate” improved for his company, providing right-sized services that met customer needs, but at the least total cost.

Clearly, the firm must employ voice of the customer and voice of the business insights in concert to determine the kinds of service and levels of service that are justified across the array of customers. Some customers will make justified demands based on the value they offer in return. Other customers will make demands for which there is insufficient justification. Knowing which customers are “worthy” of time and effort is critical in doing the right things right, the essence of Lean Six Sigma Logistics. Beyond the economics at work, it is important for the firm to develop flexible, robust processes to deliver on diverse needs profitably. Value stream maps help in this regard.

VALUE STREAM MAPPING

Many companies start down the Lean path by conducting a value stream mapping analysis. A value stream map uses flowchart techniques to capture visually the sum of activities performed in the sourcing, making, and delivery of a specific item or product. Value stream maps are similar to process maps, though a subtle difference is found in their focus. Whereas a process map focuses on a process

Figure 20.4. Value Stream of the Ferryboat Experience.

that can apply across products and items, a value stream map is product centric and, therefore, likely to span across multiple processes. Process maps ordinarily serve as the first step in value stream mapping. Despite this difference in dimensionality, the general purpose is the same: to identify waste and opportunities for eliminating it. The specific purpose of the value stream map is to identify: (1) activities that create value in the eyes of customers, (2) activities that create no value yet are necessary steps, and (3) activities that create no value and are candidates for waste elimination.*

Figure 20.4 illustrates the value stream map for the ferry ride described earlier in Section 2. In this example, we see a fifty-two-minute experience for the passenger of the ferry service, of which only eight minutes (15 percent of the total time) lend any value to the customer. The action of purchasing the ticket only offers value if it serves as an opportunity for service inquiry or information gathering; the ticket purchase itself is not a value-added experience. Also note that the ride — what people are actually paying for — consumes only five of the fifty-two minutes. Two immediate opportunities for improvement are noted in the figure. One is to sell tickets to customers while they wait rather than when they board the ferry, eliminating nine of the forty-three nonvalue-added minutes. The other opportunity is to engage in a continuous check during the loading activity, rather than after all vehicles are loaded. This would save another five minutes.

Much of the benefit found in value stream mapping is tied to the fact that activities associated with sourcing, making, and delivering product span functional boundaries, and the mapping effort and its output can open everyone’s eyes to the waste created in the normal scope of business and the opportunities to improve flow. By providing a visual depiction of the value-added and nonvalue-added activities present in the “current state,” achieving buy-in for the improvement initiative becomes less challenging and motivation for pursuing the “desired” or “future state” is reinforced. Though sourcing, making, and delivering product typically serve as the focus for value stream analysis, areas such as customer service, product development, and promotional product support should also enter the picture, given that significant waste can be eliminated through collaboration between these nonoperational business functions and operational areas like purchasing, production, and logistics. Waste is sometimes inherent when these two sides of a company fail to come together. Value stream maps are too often devoid of these nonoperational influences, perpetuating wastes that could be eliminated through internal collaboration.

The value stream map has two additional deficiencies that must be considered in its application. One, value in the eyes of the customer, cannot be fully appreciated without knowing what the customer really needs and is willing to pay to receive a particular service attribute. Companies often speculate on these bases in the absence of conducting a complete voice of the customer analysis. Second, as depicted in the ferry example, the remedy for reducing waste may not reside in simple improvements to the current process. The best solution might be a completely revised process (i.e., the bridge in the ferry example). Therefore, one should not feel captive to existing activities and processes depicted in the “as is” state. Despite these considerations, value stream mapping is a critical tool for supporting the continuous improvement culture of a company.

PARETO ANALYSIS AND ABC CLASSIFICATION

One reality associated with having a culture of continuous improvement is that perfection is never reached. At any given time, there are multitudes of processes to improve since perfection is the vision. What this amounts to is competition among the potential projects and initiatives in need of time and attention. Of course, time is the single most important resource for most companies and the one that can never be reclaimed. Therefore, selecting the improvement opportunities that will earn highest priority of our time and attention is critical.

Two tools that assist in prioritization are Pareto analysis and ABC inventory classification. Both techniques are based on the century-old writings of Italian economist Dr. Vilfredo Pareto, who recognized that approximately 80 percent of Italy’s wealth at the time resided in the hands of 20 percent of the nation’s population. Hence, the 80/20 rule was born. Despite its original interpretation, the 80/20 rule has found application to a widely diverse set of circumstances. In fact, Pareto charts can serve both strategic and operational planning purposes. They are sometimes applied to the overall business to illustrate how 80 percent of a company’s revenue is generated by 20 percent of the company’s customers or, alternatively, that 80 percent of revenue is generated by 20 percent of the company’s products and services. When used in this way, a Pareto chart that details the volume of business generated by individual customers or segments of customers provides valuable insights for strategic planning.

Viewed generically, Pareto analysis describes how a relatively small set of inputs is responsible for the vast majority of outputs, whether those outputs are favorable outputs such as revenues and profits or unfavorable outputs like defects and costs. Quality guru Joseph Juran later referred to this critical set of inputs as the “vital few” among the “trivial many.” The key is to identify those vital few (whether they drive positive or negative outcomes) and to prioritize future action around them.

In the case of Six Sigma improvement initiatives, Pareto analysis can serve as a way to highlight the root causes of problems that are most vital for resolution. Root causes that are generating the greatest variation in processes, leading to the greatest waste, will serve as the most fruitful targets for initial improvement. Several tools are identified in the next chapter to assist in linking problems to root causes. Pareto charts complement root cause analyses by displaying the relative importance of different sources of error. Figure 20.5 displays the results of a Pareto analysis conducted around the ferry experience. It depicts the frequency of customer complaints. The complaints that are leftmost on the scale present the greatest opportunity for improving customers’ overall experience with the ferry service.

It is important that the improvement team consider the “value” of correcting the problem or error. In essence, what are the long-term cost savings or additional revenue generated minus the short-term costs incurred in tackling the problem? The consideration of value can sometimes adjust the prioritization of

Figure 20.5. Pareto Analysis of Ferryboat Complaints.

improvement initiatives from one based on frequency of error to one of cost of poor quality. By combining frequency with the cost per occurrence, one can generate a Pareto chart populated by total costs. Such a hybrid measure can shed greater light on the economic impact of the error than viewing frequency in isolation.

A related prioritization concept that attaches dollars to the opportunities for improved management is the ABC inventory classification. ABC classification is used to distinguish low- and high-value inventory. If an inventory reduction is to take place, the greatest return on the reduction effort will be found in the minimization of high-value inventory. ABC classification is often used to distinguish fast-moving (“A”) inventory from slower-moving (“B”, “C”, and so on) inventories. Classifying inventory on the basis of throughput can lend value also. For instance, all other things being equal, slow-moving items would be prime candidates for immediate reduction. The greatest insight is gathered, however, by using a hybrid measure of inventory value and inventory throughput. Under these considerations, slow-moving high-value items would offer the richest opportunities for inventory reduction.

THE XY MATRIX

Another tool that can be used to establish project priorities is the XY matrix. The XY matrix drives priorities according to the voice of the customer and voice of the business considerations. While all opportunities for improvement might be regarded as worthwhile, some will prove more valuable than others. Likewise, some improvements can be harvested more easily than others. The XY matrix uses a simple input/output framework that considers both the importance of the prospective outputs and the contribution of inputs toward those outputs.

Figure 20.6 illustrates how an XY matrix can establish priorities coming away from the planning stage of analysis, pointing to opportunities where the greatest gain is achieved with initial continuous improvement efforts. The output variables (Ys) are listed across the horizontal axis and weighted, allocating 100 points among these criteria. The input variables (Xs) are then listed along the vertical axis. The organization would then populate the matrix by rating how a given input contributes to each of the desired outputs. A scale ranging from 0 to 10 is used to provide the relative contribution scores, with 0 suggesting no contribution and 10 representing great contribution to the output variable.

Figure 20.6. The XY Matrix: Establishing Priorities.

In taking a look at the sample matrix in the figure, the first input variable (space utilization) contributes little to customer retention but considerably to productivity and cost, relative to the other input variables.

Once the matrix is fully populated, the organization calculates the rank of each of the input variables by summing the products of each input’s contribution times the weight of each criterion. In the case of space utilization, we use the following calculation to determine a rank score of 565:

After calculating the rank score for each input variable, we can compare values. The input variable with the highest value becomes the focal point for the organization’s improvement efforts.

Ultimately, an organization should walk away from an XY matrix with consensus opinion about what issues to tackle, in what order, and which resources will be called on to generate results. A caveat attached to conducting an XY matrix analysis is the assumed independence of actions. That is, the opportunities presented among the input variables are all assumed to be feasible at the current time. However, after initiating the first action, the conditions may change such that other prospects listed among the possible inputs are no longer viable or no longer necessary. For that reason, interaction among inputs as well as between the inputs and outputs should be considered before taking any demonstrative action, realizing that one action could circumvent another or, more favorably, one action could capture multiple opportunities. For instance, in our example, the two highest ranking input variables (inventory management and receiving cycle time) can likely be pursued in unison to generate even greater value for the customer.

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* Womack, James P. and Jones, Daniel T., Lean Thinking, Simon & Schuster, New York, 1996.